Columbus Gold (CGT.V) seems to be the most successful one of all companies under the Columbus Group-umbrella as the company was able to quickly grow the resource base at its flagship project whilst attracting Nordgold (NORD.L) as a joint venture partner in the process.
Columbus Gold has now completed an updated resource estimate and a maiden PEA on the property, and that PEA will be the focus of this report on Columbus Gold.
About the history of Paul Isnard
The PEA has been focusing on the Montagne D’Or zone of the Paul Isnard project in French Guiana. The project is located in the jungle approximately 200 kilometers west of Cayenne, the capital of French Guiana. There is a dirt road from the port city of St Laurent du Maroni to the project, but this road might have to be upgraded to allow for the transportation of the mining and milling equipment.
There has been historical mining at the project as garimpeiro’s were trying to recover the gold at surface before a French company called AuPlata moved in and secured the land package. Subsequently, Columbus Gold entered into an agreement with AuPlata and has now secured a 100% interest in the property after buying out AuPlata’s stake in Paul Isnard.
French Guiana is an integral part of France, and as such, Columbus Gold needs to adhere to the French legislation. Granted, France isn’t really seen as a mining country, but a few years ago it got its ducks in a row and overhauled the mining system, thereby instating four separate categories, ranging from no mining activities allowed to only underground mining allowed to end up at a category where open pit mining is allowed (sometimes subject to conditions).
The Montagne D’Or project is located in Zone 2, which means open pit mining is allowed but is subject to certain conditions. These conditions are pretty simple as Columbus Gold just needs to complete an environmental impact study, obey a charter of good practices and prove the deposit is viable. Those are actually standard things so it’s not like Columbus Gold has to go great lengths to make sure it meets the conditions.
The input parameters of the Preliminary Economic Assessment
As promised before, Columbus Gold has completed a PEA by the summer of 2015 after it already updated its resource estimate to an in-pit resource of almost 5 million ounces of gold (based on a cutoff grade of 0.4 g/t). However, Columbus Gold preferred quality over quantity and instead of basing its economic study on the resource estimate at an average grade of 1.47 g/t, it preferred to use a higher cutoff-grade for the PEA.
In its base case scenario, Columbus Gold applied a cutoff grade of 0.7 g/t resulting in a remaining resource of 4.5 million ounces gold at an average grade of in excess of 1.75 g/t. This once again emphasizes how robust the resource estimate was, as a 75% increase in cutoff grade and a 19% increase in the average grade resulted in just 10% fewer ounces.
The mine plan calls for a processing plant with a capacity of 12,500 tonnes per day (or 4.5 million tonnes per year), processing ore from a large 2.5 kilometer long open pit containing approximately 3.2 million ounces of gold using the higher cutoff-grade.
There’s also a negative implication by going after the higher grade ore; the strip ratio increases as the ratio waste:ore obviously goes up. Whereas the strip ratio was 3.6 when using the 0.4 g/t cutoff grade, it has now increased to 5.04 and that’s a little bit on the high side.
The initial capital expenditures are estimated at $366.4M and this includes a 14% contingency (totalling $44.4M) but there’s also a relatively high sustaining capex of $216M and a final reclamation cost of $25M. The sustaining capex sounds very high for an open pit mine which traditionally doesn’t need to postpone a lot of development expenses (compared to underground mines), but almost 75% of the sustaining capex will have to be spent on further stripping activities. That’s not a surprise given the strip ratio of 5, but it once again shows how important the choice of the right cutoff grade is. If the gold price would for instance move back up to $1500/oz, Columbus Gold would be able to reduce its cutoff grade to 0.4 g/t again, thereby reducing the strip ratio and saving several million dollars in sustaining capital expenditures.
The initial capital expenditure is actually pretty decent considering the Montagne D’Or zone will be a relatively consistent producer with an average production rate of 278,000 ounces of gold in the first 5 years of the mine life. This relatively high production rate has been very helpful to keep the IRR at a decent level (23% after-tax based on a $1200 gold price) and will help covering the sustaining capex which already immediately kicks in from year 1 at $15.3M increasing to $27.5M (or $100/oz) in year two.
The after-tax NPV8% of the project based on a gold price of $1200/oz is $324M and this seems to be a little bit disappointing at first sight, as there’s a ‘golden rule’ the NPV should not be lower than the initial capital expenditures. However, we do think an 8% discount rate is a little bit high for a project in a developed country (France hardly is a third-world country) and if you would apply a 6% or 5% discount rate, the NPV would increase to respectively $405M and $451M, meeting the requirements of the rule of thumb.
Is there room for improvement?
Yes, there is. After reading through the official NI43-101 compliant technical report, we immediately noticed Columbus Gold should be able to make some minor technical adjustments which could further improve the economics of this large gold project.
First of all, the economics of this project are based on a total amount of 3.23 million ounces being mined from the open pit, and only 3.2 million tonnes of the processed ore will be coming from the inferred resource category. Given the fact the inferred resource contained in excess of 18 million tonnes of rock at a cutoff grade of 0.7 g/t, there’s definitely the potential to increase the total tonnage to be processed by 10 million tonnes, extending the mine life by another two years, producing an additional 400,000-500,000 ounces of gold.
Secondly, the company had to make a decision about when it would cut off on its drill results for an updated resource estimate and the PEA. By now, it’s very obvious the mineralized trend extends for several more kilometers and we dare to put a lot of money on the fact that this project will produce much more gold than the 3.07 million ounces envisaged in this PEA. This might sound trivial, but the Net Present Value of this project will very likely surpass the $700M mark once Columbus Gold is able to base its economic study on a mineable resource of at least 5 million ounces.
There’s also the potential to (slightly) reduce the strip ratio by playing around with the average slope ratio of 45° for the open pit. Even just a 1 degree variation might have a noticeable impact on the total amount of waste and thus directly on the strip ratio and the pre-stripping costs.
And finally, as the Montagne D’Or zone is located in the jungle, SRK’s report shows the company relies on diesel and palm oil generators to provide sufficient power to the processing plant. That’s the most expensive option, and 40% of the processing cost ($6 out of $15/t) has to be spent on this type of power generation.
But there is a second option! It would technically be feasible to construct a power line from St Laurent du Maroni towards the project which would be approximately $40M more expensive. However, this would reduce the processing cost with $2.7/t. Based on an annual throughput of 4.5 million tonnes, this incremental expense would have a payback period of 4 years so it’s definitely worth to investigate this option, even though CGT would very likely still need some on-site generators as a back-up plan.
Long story short, deciding about diesel/palm oil fired generators or linking the project to the power grid will have to be part of a trade-off study, but the more the mine life could be extended, the more sense is makes to connect Montagne D’Or with the existing power supply (and we wouldn’t rule out any potential subsidies from the local government to ‘make this happen’). In any case, if Nordgold does what it has always done before, making the trade-off comparison will be their problem as we remain convinced Nordgold will eventually make a move to consolidate the entire ownership of the project.
Conclusion
As a general conclusion, it’s easy to say this indeed is a very ‘preliminary’ economic study and even though Columbus Gold was allowed to add more inferred resources to the mine plan, it didn’t do so, leaving a lot of potential upside on the table.
We remain convinced the Paul Isnard project as a whole contains in excess of 8 million ounces as the strike length appears to be twice as long as the current pit outline. Unfortunately it’s unlikely Columbus Gold will be able to explore all of it before Nordgold makes its final move and offers to acquire either the project or Columbus Gold as a whole (whilst spinning of the Nevada assets).
Even if you’d double Columbus Gold’s share count (assuming Nordgold doesn’t take Columbus Gold out and CGT has to finance its share of the capital expenditure), the after-tax NPV5% per share of CGT would still be C$1.04, 174% higher than today’s share price.
There will be more good things to come from Columbus Gold which is now drilling at both the French Guiana project as well as its Eastside project in Nevada, and a temporary bump in the road of the gold price doesn’t change the quality of these assets.
Disclosure: Columbus Gold is a sponsor of the website. We also hold a long position. Please see our disclaimer for current positions.
